What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2021-01-15 compared with 2020-01-21 · 261 added, 214 removed, 272 unchanged (64% of the section changed)

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Discussion regarding our financial condition and results of operations for fiscal 2019 as compared to fiscal 2018 is included in Item 7 of our Annual Report on Form 10-K for the fiscal year ended November 29, 2019, filed with the SEC on January 21, 2020.

Subsequent to November 27, 2020, we completed our acquisition of Workfront, a privately held company that provides a work management platform for marketers, for approximately $1.5 billion in cash consideration.

Workfront will be integrated into our Digital Experience reportable segment for financial reporting purposes in the first quarter of fiscal 2021.

During fiscal 2019, we acquired the remaining interest in Allegorithmic SAS (“Allegorithmic”), a privately held 3D editing and authoring software company for gaming and entertainment, for approximately $106 million in cash consideration, and integrated it into our Digital Media reportable segment.

During fiscal 2018, we completed our acquisitions of Marketo, a privately held marketing cloud platform company, for $4.73 billion and Magento, a privately held commerce platform company, for $1.64 billion , and integrated them into our Digital Experience reportable segment.

During fiscal 2017, we completed our acquisition of TubeMogul, a publicly held video advertising platform company, for $560.8 million , and integrated it into our Digital Experience reportable segment.

During fiscal 2018, we completed our acquisitions of Marketo, a privately held marketing cloud platform company, for approximately $4.73 billion and Magento, a privately held commerce platform company, for approximately $1.64 billion, and integrated them into our Digital Experience reportable segment.

We also completed other immaterial business acquisitions during the fiscal years presented.

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Actual results could differ materially from these estimates under different assumptions or conditions.

On a regular basis, we evaluate our assumptions, judgments and estimates.

We evaluate our assumptions, judgments and estimates on a regular basis.

We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.

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Cloud-based features that are integral to our Creative Cloud and Document Cloud offerings and that work together with the on-premise/on-device software include, but are not limited to:

Creative Cloud Libraries, which enable customers to access their work, settings, preferences, and other assets seamlessly across desktop and mobile devices and collaborate across teams in real time;

Creative Cloud Libraries, which enable customers to access their work, settings, preferences and other assets seamlessly across desktop and mobile devices and collaborate across teams in

shared reviews which enable simultaneous editing and commenting of PDFs across desktop, mobile and web;

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In addition, we are subject to the continual examination of our income tax returns by the U.S.

Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities.

We expect future examinations to focus on our intercompany transfer pricing practices as well as other matters.

Internal Revenue Service and other domestic and foreign tax authorities.

These tax examinations are expected to focus on our intercompany transfer pricing practices, application of tax rules, and other matters.

We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from such examinations.

We believe such estimates to be reasonable;

however, the final determination of any of these examinations could significantly impact the amounts provided for income taxes in our Consolidated Financial Statements.

however, we cannot provide assurance that the final determination of any of these examinations will not have a significant impact on the amounts provided for income taxes in our Consolidated Financial Statements.

During fiscal 2020, we completed intra-entity transfers of certain intellectual property rights (“IP rights”) which resulted in the establishment of deferred tax assets, net of valuation allowance, and related tax benefits of $ 224 million and $ 1.13 billion, based on the fair value of the IP rights transferred in April and November 2020, respectively.

The determination of the fair value involves significant judgment on future revenue growth, operating margins and discount rates.

Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results.

The sustainability of our future tax benefits is dependent upon the acceptance of the valuation estimates and assumptions by the taxing authorities.

Recent Accounting Pronouncements

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Overview of 2020

For fiscal 2019 , we reported strong financial results consistent with the continued execution of our long-term plans for our two strategic growth areas, Digital Media and Digital Experience, while continuing to market and license a broad portfolio of products and solutions.

On December 1, 2018, the beginning of our fiscal year 2019, we adopted the requirements of the new revenue standard utilizing the modified retrospective method of transition, and began to report our financial results under the new revenue standard.

The impact of the adoption was not significant to our results of operations.

For our fiscal 2020, we experienced strong demand across our Digital Media offerings consistent with the continued execution of our long-term plans with respect to this segment.

In our Digital Experience segment, we continued to experience growth in software-based subscription revenue across our portfolio of offerings.

During the second quarter of fiscal 2020, we began to discontinue our transaction-driven Advertising Cloud offerings, allowing us to focus our investment on strategic growth initiatives.

In the fourth quarter of fiscal 2020, we moved our Advertising Cloud offerings from our Digital Experience segment into our new Publishing and Advertising segment, which combined Advertising Cloud with our previous Publishing segment.

This realignment is consistent with how we manage our Digital Experience segment to better reflect the strategic shift related to Advertising Cloud and to align with our overall core value proposition of delivering on customer experience management.

Digital Media

In our Digital Media segment, we are a market leader with Creative Cloud, our subscription-based offering which provides desktop tools, mobile apps and cloud-based services for designing, creating and publishing rich and immersive content.

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Because of the shift towards Creative Cloud subscriptions and Enterprise Term License Agreements (“ETLAs”), revenue from perpetual licensing of our Creative products has been immaterial to our business.

We are also a market leader with our Adobe Document Cloud offerings built around our Adobe Acrobat family of products, including Adobe Acrobat Reader DC, and a set of integrated cloud-based document services, including Adobe Sign.

We are also a market leader with our Document Cloud offerings built around our Adobe Acrobat family of products, including Adobe Acrobat Reader DC, and a set of integrated mobile apps and cloud-based document services, including Adobe Scan and Adobe Sign.

Acrobat provides reliable creation and exchange of electronic documents, regardless of platform or application source type.

Document Cloud, which we believe enhances the way people manage critical documents at home, in the office and across devices, includes Adobe Acrobat DC and Adobe Sign, and a set of integrated services enabling users to create, review, approve, sign and track documents whether on a desktop or mobile device.

Adobe Acrobat DC, with a touch-enabled user interface, is offered both through subscription and perpetual licenses.

Adobe Acrobat DC is offered both through subscription and perpetual licenses.

Annualized Recurring Revenue (“ARR”) is currently the key performance metric our management uses to assess the health and trajectory of our overall Digital Media segment.

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We calculate ARR as follows:

Annual Value of Creative Cloud Subscriptions and Services

Creative ARR Annual Value of Creative Cloud Subscriptions and Services

Annual Creative ETLA Contract Value

Document Cloud ARR

Annual Value of Document Cloud Subscriptions and Services

Document Cloud ARR Annual Value of Document Cloud Subscriptions and Services

Annual Document Cloud ETLA Contract Value

Digital Media ARR

Digital Media ARR Creative ARR

Document Cloud ARR

Creative ARR exiting fiscal 2020 was $8.72 billion, up from $7.25 billion at the end of fiscal 2019.

Document Cloud ARR exiting fiscal 2019 was $1.09 billion , up from $791 million at the end of fiscal 2018 .

Document Cloud ARR exiting fiscal 2020 was $1.46 billion, up from $1.08 billion at the end of fiscal 2019.

Total Digital Media ARR grew to $10.18 billion at the end of fiscal 2020, up from $8.33 billion at the end of fiscal 2019.

Revaluing our ending ARR for fiscal 2019 using currency rates at the beginning of fiscal 2019 , our Digital Media ARR at the end of fiscal 2019 would be $8.33 billion or approximately $66 million lower than the ARR reported above.

Revaluing our ending ARR for fiscal 2020 using currency rates at the beginning of fiscal 2021, our Digital Media ARR at the end of fiscal 2020 would be $10.26 billion or approximately $77 million higher than the ARR reported above.

Our success in driving growth in ARR has positively affected our revenue growth.

Creative revenue in fiscal 2020 was $7.74 billion, up from $6.48 billion in fiscal 2019 and representing 19% year-over-year growth.

Document Cloud revenue in fiscal 2019 was $1.22 billion , up from $981.8 million in fiscal 2018 and representing 25% year-over-year revenue growth.

Document Cloud revenue in fiscal 2020 was $1.50 billion, up from $1.22 billion in fiscal 2019 and representing 22% year-over-year revenue growth and reflecting an increase in demand driven by the shift to remote work as well as our continued efforts to transition Document Cloud to a subscription-based model.

Total Digital Media segment revenue grew to $9.23 billion in fiscal 2020, up from $7.71 billion in fiscal 2019 and representing 20% year-over-year growth.

These increases were driven by strong net new user growth, including those resulting from the current work-from-home environment reflecting expanded digital engagement.

Digital Experience

We are a market leader in the fast-growing category addressed by our Digital Experience segment.

Our Digital Experience business provides comprehensive solutions that include analytics, targeting, media optimization, digital experience management, cross-channel campaign management, marketing automation, audience management, commerce, premium video delivery and monetization.

These comprehensive solutions enable marketers to measure, personalize and optimize marketing campaigns and digital experiences across channels for optimal marketing performance.

During fiscal 2019, our hierarchy of solutions in the Digital Experience segment consisted of the following cloud offerings:

Adobe Advertising Cloud—delivers an end-to-end platform for managing advertising across traditional TV and digital formats, and simplifies the delivery of video, display and search advertising across channels and screens.

Adobe Analytics Cloud—enables businesses to move from insights to actions in real time by uniquely integrating audiences as the core system of intelligence for the enterprise;

makes data available across all Adobe clouds through the capture, aggregation, rationalization and understanding of vast amounts of disparate data and then translating that data into singular customer profiles;

includes Adobe Analytics and Adobe Audience Manager.

Adobe Marketing Cloud—provides an integrated set of solutions to help marketers differentiate their brands and engage their customers, helping businesses manage, personalize, and orchestrate campaigns and customer journeys;

includes Adobe Experience Manager (“AEM”), Adobe Campaign, Adobe Target, Marketo Engage and Adobe Primetime.

Adobe Commerce Cloud—provides digital commerce, order management and predictive intelligence based on a unified commerce platform enabling shopping experiences across a wide array of industries;

includes Magento Commerce.

The Adobe Experience Cloud applications, services and platform are designed to manage customer journeys, enable shoppable experiences and deliver intelligence for businesses of any size in any industry.

Our differentiation and competitive advantage is strengthened by our ability to use the Adobe Experience Platform to connect our comprehensive set of solutions.

Adobe Experience Cloud is focused on delivering solutions for our enterprise customers across the following strategic growth pillars:

• Customer data and insights.

Our solutions deliver real-time customer profiles and intelligence across the customer journey.

Our offerings include Adobe Experience Platform, Adobe Analytics, Adobe Audience Manager, Customer Journey Analytics, Real-time Customer Data Platform and Intelligent Services.

• Content and commerce.

Our solutions to help customers manage, deliver, test, target and optimize content delivery and enable shopping experiences that scale from mid-market to enterprise businesses.

Our offerings include Adobe Experience Manager, Adobe Target and Adobe Commerce.

• Customer journey management.

Our solutions help businesses manage, personalize and orchestrate campaigns and customer journeys across B2E use cases.

Our offerings include Adobe Campaign, Marketo Engage and Journey Orchestration.

In addition to chief marketing officers, chief revenue officers and digital marketers, users of our Digital Experience solutions include advertisers, campaign managers, publishers, data analysts, content managers, social marketers, marketing executives and information management and technology executives.

These customers often are involved in workflows that utilize other Adobe products, such as our Digital Media offerings.

By combining the creativity of our Digital Media business with the science of our Digital Experience business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.

By combining the creativity of our Digital Media business

with the science of our Digital Experience business, we help our customers to more efficiently and effectively make, manage, measure and monetize their content across every channel with an end-to-end workflow and feedback loop.

We utilize a direct sales force to market and license our Digital Experience solutions, as well as an extensive ecosystem of partners, including marketing agencies, systems integrators and independent software vendors that help license and deploy our solutions to their customers.

We have made significant investments to broaden the scale and size of all of these routes to market, and our recent financial results reflect the success of these investments.

We achieved record Digital Experience revenue of $3.21 billion in fiscal 2019 , up from $2.44 billion in fiscal 2018 which represents 31% year-over-year growth.

Digital Experience revenue for all fiscal years presented has been updated to reflect the Advertising Cloud segment move.

Digital Experience revenue was $3.13 billion in fiscal 2020, up from $2.80 billion in fiscal 2019 which represents 12% year-over-year growth.

Driving this increase was the increase in subscription revenue across our offerings which grew to $2.66 billion in fiscal 2020 from $2.28 billion in fiscal 2019, representing 17% year-over-year growth.

Largely contributing to the increase in Digital Experience subscription revenue was revenue associated with Marketo Engage.

To a lesser extent, subscription revenue associated with Magento Commerce and Adobe Experience Manager also contributed to the overall increase.

We expect that continued demand across our portfolio of Adobe Experience Cloud solutions, including new offerings and enhancements to existing solutions, will drive revenue growth in future years.

Our financial results for fiscal 2019 are presented in accordance with the new revenue standard that was adopted under the modified retrospective method at the beginning of fiscal 2019.

Prior period results have not been restated which limits the comparability of our results of operations for fiscal 2019 when compared to the year-ago period.

See Note 2 of our Notes to Consolidated Financial Statements for information regarding adoption of the new revenue standard.

COVID-19 UPDATE

In March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic.

This pandemic has had widespread, rapidly-evolving and unpredictable impacts on global societies, economies, financial markets and business practices.

Federal and state governments have implemented measures in an effort to contain the virus, including physical distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes and closure of non-essential businesses.

Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity.

As a result, we have taken action to direct our teams to work from home, suspend travel and replace in-person events such as Adobe Summit and MAX, with digital events through July 2021.

During the pandemic, digital has become the primary way for people to connect, work, learn and be entertained, and for businesses to engage with customers.

This macro trend towards all things digital has increased the importance and relevance of our solutions and accelerated the tailwinds that benefit our business, which contributed to our continued growth year over year.

However, while our revenue and earnings are relatively predictable as a result of our subscription-based business model, the broader implications of the pandemic on our results of operations and overall financial performance remain uncertain.

See Risk Factors for further discussion of the possible impact of the pandemic on our business.

Financial Performance Summary for Fiscal 2020

• Total Digital Media ARR of approximately $10.18 billion as of November 27, 2020 increased by $1.85 billion, or 22%, from $8.33 billion as of November 29, 2019.

The change in our Digital Media ARR was primarily due to stronger new user adoption of our Creative Cloud and Adobe Document Cloud offerings.

The increase in our Digital Media ARR was primarily due to new user adoption of our Creative Cloud and Document Cloud offerings.

• Creative revenue of $7.74 billion increased by $1.25 billion, or 19%, during fiscal 2020, from $6.48 billion in fiscal 2019.

The increase was primarily due to the increase in subscription revenue associated with our Creative Cloud offerings.

Document Cloud revenue of $1.50 billion increased by $272 million, or 22%, during fiscal 2020, from $1.22 billion in fiscal 2019.

The increases were primarily due to subscription revenue growth associated with our Creative Cloud and Document Cloud offerings.

• Digital Experience revenue of $3.13 billion increased by $330 million, or 12%, during fiscal 2020, from $2.80 billion in fiscal 2019.

The increase was primarily due to the increase in subscription revenue driven by the addition of Marketo and Magento, which we acquired in the later part of fiscal 2018.

Our total deferred revenue of $3.50 billion as of November 29, 2019 increased by $447.1 million , or 15% , from $3.05 billion as of November 30, 2018 .

The increase was primarily due to increases in new contracts and the timing of renewals for offerings with cloud-enabled services and hosted services.

Cost of revenue of $1.67 billion increased by $477.7 million , or 40% , during fiscal 2019 , from $1.19 billion in fiscal 2018 .

The increase was primarily due to increases in amortization of intangibles from our acquisition of Magento and Marketo in the later part of fiscal 2018.

To a lesser extent, increases in hosting services and data center costs also contributed to the overall increase in cost of revenue.

Operating expenses of $6.23 billion increased by $1.24 billion , or 25% , during fiscal 2019 , from $4.99 billion in fiscal 2018 .

The increase was primarily due to increases in base compensation and related benefits costs and stock-based compensation expense associated with headcount growth, including additions from the acquisitions of Magento and Marketo in the later part of fiscal 2018.

To a lesser extent, increases in marketing spend also contributed to the overall increase in operating expenses.

Net income of $2.95 billion increased by $360.7 million , or 14% , during fiscal 2019 from $2.59 billion in fiscal 2018 primarily due to increases in revenue and offset in part by the increases in operating expenses and cost of revenue.

Net cash flow from operations of $4.42 billion during fiscal 2019 increased by $392.5 million , or 10% , from $4.03 billion during fiscal 2018 primarily due to higher net income adjusted for the net effect of non-cash items.

This increase was offset in part by comparatively lower increases in income taxes payable and higher increases in prepaid expenses and other assets.

(dollars in millions)

The increase was primarily due to subscription revenue growth across our offerings.

• Remaining performance obligation of $11.34 billion as of November 27, 2020 increased by $1.52 billion, or 15%, from $9.82 billion as of November 29, 2019, primarily due to new contracts and renewals for our Digital Media and Digital Experience offerings.

• Cost of revenue of $1.72 billion increased by $49 million, or 3%, during fiscal 2020, from $1.67 billion in fiscal 2019 primarily due to increases in hosting services and data center costs, offset in large part by decreases in Advertising Cloud media costs.

• Operating expenses of $6.91 billion increased by $679 million, or 11%, during fiscal 2020, from $6.23 billion in fiscal 2019 primarily due to increases in base and incentive compensation and related benefits costs, as well as increased marketing spend.

These increases were offset in part by decreases in travel-related expenses.

• Net income of $5.26 billion increased by $2.31 billion, or 78%, during fiscal 2020 from $2.95 billion in fiscal 2019 primarily due to increases in revenue and the non-recurring benefit from income taxes resulting from intra-entity transfers of certain intellectual property rights.

• Net cash flows from operations of $5.73 billion during fiscal 2020 increased by $1.31 billion, or 30%, from $4.42 billion during fiscal 2019 primarily due to higher net income adjusted for the net effect of non-cash items.

Presentation Changes

In the fourth quarter of fiscal 2020, we moved our Advertising Cloud offerings from our Digital Experience segment into our new Publishing and Advertising segment, which combined our Advertising Cloud offerings with our previous Publishing segment.

Further, we reclassified revenue and related cost of revenue of our Advertising Cloud offerings from subscription to services and other on our Consolidated Statements of Income.

Financial information for all fiscal years presented has been updated to reflect these reclassifications.

There were no other updates to disclosures included in our prior year report in relation to the reclassifications.

Our financial results for fiscal 2020 and 2019 are presented in accordance with Accounting Standards Update No.

2014-09, Revenue from Contracts with Customers (Topic 606), which was adopted under the modified retrospective method at the beginning of fiscal 2019.

Fiscal 2018 results have not been restated which limits its comparability with other fiscal years presented.

(dollars in millions) 2020 2019 2018 % Change

2020-2019 % Change

Subscription $ 11,626 $ 9,634 $ 7,604 21 % 27 %

Percentage of total revenue 90 % 86 % 84 %

Product 507 648 622 (22) % 4 %

Percentage of total revenue 4 % 6 % 7 %

Services and support

Services and other 735 889 804 (17) % 11 %

Percentage of total revenue 6 % 8 % 9 %

Total revenue $ 12,868 $ 11,171 $ 9,030 15 % 24 %

Subscription Revenue by Segment

Our subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings including Creative Cloud and certain of our Digital Experience and Document Cloud services.

We recognize subscription revenue ratably over the term of agreements with our customers, beginning with commencement of service.

Our subscription revenue is comprised primarily of fees we charge for our subscription and hosted service offerings, and related support, including Creative Cloud and certain of our Adobe Experience Cloud and Document Cloud services.

We primarily recognize subscription revenue ratably over the term of agreements with our customers, beginning with commencement of service.

Subscription revenue related to certain offerings, where fees are based on a number of transactions and invoicing is aligned to the pattern of performance, customer benefit and consumption, are recognized on a usage basis.

We have the following reportable segments:

Digital Media, Digital Experience and Publishing.

Digital Media, Digital Experience, and Publishing and Advertising.

Subscription revenue by reportable segment for fiscal 2020, 2019 and 2018 is as follows:

(dollars in millions)

(dollars in millions) 2020 2019 2018 % Change

2020-2019 % Change

Digital Media $ 8,813 $ 7,208 $ 5,858 22 % 23 %

Digital Experience 2,660 2,280 1,600 17 % 43 %

Publishing and Advertising 153 146 146 5 % *

Total subscription revenue $ 11,626 $ 9,634 $ 7,604 21 % 27 %

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(*) Percentage is less than 1%.

Our product revenue is primarily comprised of revenue from distinct on-premise software licenses recognized at a point in time and certain of our OEM and royalty agreements.

Our services and support revenue is comprised of consulting, training and maintenance and support, primarily related to the licensing of our enterprise offerings and the sale of our hosted Digital Experience services.

Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products.

Our maintenance and support offerings, which entitle customers to receive desktop product upgrades and enhancements or technical support, depending on the offering, are generally recognized ratably over the term of the arrangement.

Our product revenue is comprised primarily of fees related to licenses for on-premise software purchased on a perpetual basis, for a fixed period of time or based on usage for certain of our OEM and royalty agreements.

We primarily recognize

product revenue at the point in time the software is available to the customer, provided all other revenue recognition criteria are met.

Services and Other

Our services and other revenue is comprised primarily of fees related to consulting, training, maintenance and support and our advertising offerings.

We typically sell our consulting contracts on a time-and-materials and fixed-fee basis.

These revenues are recognized as the services are performed for time and materials contracts and on a relative performance basis for fixed-fee contracts.

Training revenues are recognized as the services are performed.

Our maintenance and support offerings, which entitle customers, partners and developers to receive desktop product upgrades and enhancements or technical support, depending on the offering, are generally recognized ratably over the term of the arrangement.

Transaction-based advertising revenue is recognized on a usage basis as we satisfy the performance obligations to our customers.

In fiscal 2020, we categorized our products into the following reportable segments:

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Our customers also include knowledge workers who create, collaborate on and distribute documents and creative content.

Digital Experience —Our Digital Experience segment provides products, services and solutions for creating, managing, executing, measuring, monetizing and optimizing customer experiences from advertising to commerce.

• Digital Experience —Our Digital Experience segment provides products, services and solutions for creating, managing, executing, measuring, monetizing and optimizing customer experiences from analytics to commerce.

Our customers include marketers, advertisers, agencies, publishers, merchandisers, merchants, web analysts, data scientists, developers, marketing executives, information management and technology executives, product development executives, and sales and support executives.

Publishing —Our Publishing segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to our legacy type and OEM printing businesses.

It also includes our web conferencing and document and forms platforms.

• Publishing and Advertising —Our Publishing and Advertising segment addresses market opportunities ranging from the diverse authoring and publishing needs of technical and business publishing to our legacy type and OEM printing businesses.

It also includes our platforms for Advertising Cloud, web conferencing, document and forms, and Primetime.

Segment Information

(dollars in millions)

(dollars in millions) 2020 2019 2018 % Change

2020-2019 % Change

Digital Media $ 9,233 $ 7,707 $ 6,325 20 % 22 %

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Percentage of total revenue 24 % 25 % 23 %

Publishing and Advertising 510 669 632 (24) % 6 %

Percentage of total revenue 4 % 6 % 7 %

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Digital Media

Revenue from Digital Media increased $1.38 billion during fiscal 2019 as compared to fiscal 2018 , driven by increases in revenue associated with our Creative and Document Cloud offerings.

Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during fiscal 2019 .

The increase was primarily due to an increase in subscription revenue across all of our Creative Cloud offerings driven by increases in net new subscriptions.

Adobe Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during fiscal 2019 as compared to fiscal 2018 primarily due to increases in subscription revenue driven by strong adoption of our Document Cloud.

Revenue from Digital Media increased $1.53 billion during fiscal 2020 as compared to fiscal 2019, driven by increases in revenue associated with our Creative and Document Cloud offerings due to increased demand and digital engagement amid the work-from-home environment.

Revenue associated with our Creative offerings, which includes our Creative Cloud, perpetually licensed Creative and stock photography offerings, increased during fiscal 2020 primarily due to increases in net new subscriptions across our Creative Cloud offerings.

Document Cloud revenue, which includes our Acrobat product family and Adobe Sign service, increased during fiscal 2020 primarily due to increases in subscription revenue driven by strong adoption of our Document Cloud offerings including Adobe Sign.

Digital Experience

Revenue from Digital Experience increased $762.5 million during fiscal 2019 , as compared to fiscal 2018 primarily due to subscription revenue growth across our Experience Cloud offerings.

Largely contributing to the subscription revenue increases were revenue associated with Marketo Engage, which we acquired in the fourth quarter of fiscal 2018, and revenue associated with our Magento Commerce offerings.

Also contributing to the subscription revenue growth were increases in our AEM and Campaign offerings.

Revenue from Digital Experience increased $330 million during fiscal 2020, as compared to fiscal 2019 primarily due to subscription revenue growth across our offerings of which the largest contributors were our AEM and Marketo Engage offerings.

Geographical Information

(dollars in millions)

(dollars in millions) 2020 2019 2018 % Change

2020-2019 % Change

Americas $ 7,454 $ 6,506 $ 5,117 15 % 27 %

Percentage of total revenue 58 % 58 % 57 %

EMEA 3,400 2,975 2,550 14 % 17 %

Percentage of total revenue 26 % 27 % 28 %

APAC 2,014 1,690 1,363 19 % 24 %

Percentage of total revenue 16 % 15 % 15 %

Total revenue $ 12,868 $ 11,171 $ 9,030 15 % 24 %

Overall revenue during fiscal 2019 increased in all geographic regions as compared to fiscal 2018 primarily due to increases in Digital Media and Digital Experience revenue.

Overall revenue during fiscal 2020 increased in all geographic regions as compared to fiscal 2019 primarily due to increases in Digital Media revenue and, to a lesser extent, increases in Digital Experience revenue.

Within each geographic region, the fluctuations in revenue by reportable segment were attributable to the factors noted in the segment information above.

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Increase/(Decrease)

Euro $ (24) $ (73)

Australian Dollar (16) (27)

British Pound (5) (27)

Japanese Yen 14 2

Brazilian Real (14) (2)

Other currencies (8) (11)

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British Pound (2) 8

Japanese Yen (2) 2

Australian Dollar (1) —

Total hedging impact

Total impact $ (50) $ (98)

During fiscal 2020, the U.S.

Dollar strengthened against EMEA and other currencies, which decreased revenue in U.S.

Dollar strengthened largely against EMEA currencies and the Australian Dollar, which decreased revenue in U.S.

Dollar equivalents.

The foreign currency impact to revenue was offset in part by hedging gains primarily from our EMEA currencies cash flow hedging programs during fiscal 2019.

The foreign currency impact to revenue was partially offset by gains primarily from our Euro cash flow hedging program.

See Note 2 of our Notes to Consolidated Financial Statements for additional details of revenue by geography.

Adoption of the new revenue standard resulted in changes to our measurement of unbilled backlog starting in fiscal 2019 such that orders with a right of termination and unbilled amounts recognized as revenue under the new revenue standard are not included in our unbilled backlog, consistent with our measurement of remaining performance obligations.

Our unbilled backlog represents expected future billings not yet recognized in revenue that are contractually committed under our existing subscription agreements.

As of November 29, 2019 , we had unbilled backlog of $6.38 billion , which excludes amounts cancellable without substantive penalty.

Approximately $2.61 billion of our unbilled backlog is not reasonably expected to be recognized during fiscal

As of November 30, 2018 , we had unbilled backlog of approximately $5.05 billion , which was measured under the accounting standard in effect for that period.

We expect that the amount of unbilled backlog will change from period to period due to certain factors, including the timing and duration of large customer subscription agreements, varying billing cycles of these agreements, timing of customer renewals, timing of revenue recognition, changes in customer financial circumstances and foreign currency fluctuations.

Our presentation of unbilled backlog may differ from that of other companies in the industry.

Cost of Revenue

(dollars in millions)

(dollars in millions) 2020 2019 2018 % Change

2020-2019 % Change

Subscription $ 1,108 $ 926 $ 574 20 % 61 %

Percentage of total revenue 9 % 8 % 6 %

Product 36 40 46 (10) % (13) %

Percentage of total revenue * * 1 %

Services and support

Services and other 578 707 575 (18) % 23 %

Percentage of total revenue 4 % 6 % 6 %

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(*) Percentage is less than 1%

Cost of subscription revenue consists of third-party royalties and expenses related to operating our network infrastructure, including depreciation expense and operating lease payments associated with computer equipment, data center costs, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of certain intangible assets and allocated overhead.

We enter into contracts with third parties for hosting services and use of data center facilities.

Our data center costs largely consist of the amounts we pay to these third parties for rack space, power and similar items.

Cost of subscription revenue also includes media costs related to impressions purchased from third-party ad inventory sources for our Adobe Advertising Cloud offerings.

Cost of subscription revenue consists of third-party hosting services and data center costs, royalty fees and other expenses related to operating our network infrastructure, including depreciation expense and operating lease payments associated with computer equipment, salaries and related expenses of network operations, implementation, account management and technical support personnel, amortization of certain intangible assets and allocated overhead.

Cost of subscription revenue increased due to the following:

Components of

Amortization of intangibles

2020-2019 Components of

Hosting services and data center costs 10 % 16 %

Media rebill costs

Royalty costs

Incentive compensation, cash and stock-based 5 5

Royalty costs 3 5

Base compensation and related benefits associated with headcount 3 5

Software licenses 2 2

Amortization of intangibles (2) 24

Various individually insignificant items (1) 4

Amortization of intangibles increased during fiscal 2019 as compared to fiscal 2018 primarily due to amortization of intangible assets purchased through our acquisitions of Magento and Marketo in fiscal 2018.

Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization of intangibles and the costs associated with the manufacturing of our products.

Cost of product revenue decreased during fiscal 2019 as compared to fiscal 2018 primarily due to decreases in localization costs.

Services and Support

Cost of services and support revenue is primarily comprised of employee-related costs and associated costs incurred to provide consulting services, training and product support.

Cost of services and support revenue increased due to the following:

Total change 20 % 61 %

Cost of product revenue is primarily comprised of third-party royalties, amortization related to purchased intangibles and acquired rights to use technology, excess and obsolete inventory, localization costs and the costs associated with the manufacturing of our products.

Services and Other

Cost of services and other revenue is primarily comprised of employee-related and other associated costs incurred to provide consulting services, training and product support.

Cost of services and other also includes media costs related to impressions purchased from third-party ad inventory sources for our transaction-based Adobe Advertising Cloud offerings, which we began to discontinue in the second quarter of fiscal 2020.

Cost of services and other fluctuations were due to the following:

Components of

Incentive compensation, cash and stock-based

2020-2019 Components of

Media costs (9) % 10 %

Base compensation and related benefits associated with headcount (7) 4

Incentive compensation, cash and stock-based (1) 6

Professional and consulting fees 3 —

Various individually insignificant items (4) 3

Total change (18) % 23 %

Operating Expenses

(dollars in millions)

2020 2019 2018 % Change

Research and development $ 2,188 $ 1,930 $ 1,538 13 %

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Research and Development

Research and development expenses consist primarily of salary and benefit expenses for software developers, contracted development efforts, related facilities costs and expenses associated with computer equipment used in software development.

Research and development expenses consist primarily of salary and benefit expenses for software developers, contracted development efforts, third party fees for hosting services, related facilities costs and expenses associated with computer equipment used in software development.

Research and development expenses increased due to the following:

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Base compensation and related benefits associated with headcount 3

Professional and consulting fees

Various individually insignificant items

Total change 13 %

We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced offerings and solutions.

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Sales and Marketing

Sales and marketing expenses consist primarily of salary and benefit expenses, amortization of contract acquisitions costs including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel.

Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.

Sales and marketing expenses consist primarily of salary and benefit expenses, amortization of contract acquisition costs, including sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel.

Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows and events, public relations and other market development programs.

Sales and marketing expenses increased due to the following:

Components of

Marketing spending related to campaigns, events and overall marketing efforts

Base compensation and related benefits associated with headcount

Marketing spend related to campaigns, events and overall marketing efforts 8 %

Incentive compensation, cash and stock-based 4

Transaction fees 2

Base compensation and related benefits associated with headcount 1

Professional and consulting fees (1)

Amortization of contract acquisition costs, including sales commissions

Various individually insignificant items

Total change 11 %

General and Administrative

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Components of

Professional and consulting fees

Facilities and telecom

Incentive compensation, cash and stock-based 5 %

Charges related to cancellation of corporate events, net of recoveries 3

Bad debt expense 2

Charitable contributions 2

Base compensation and related benefits associated with headcount 1

Software licenses

Various individually insignificant items (1)

Total change 10 %

During fiscal 2020, we recorded net charges related to the cancellation of our corporate events due to concerns over the pandemic.

Certain of these charges were reversed as we successfully negotiated the right to apply certain commitments to other events.

Bad debt expense increased during fiscal 2020 primarily due to specific reserves for certain categories of customers that were more impacted by the changes in the macroeconomic environment as a result of the pandemic.

Amortization of Intangibles

During the last several years, we have completed a number of business combinations and asset acquisitions.

As a result of these acquisitions, we purchased intangible assets that are being amortized over their estimated useful lives ranging from one to fifteen years.

Amortization expense increased during fiscal 2019 as compared to fiscal 2018 primarily due to amortization of intangible assets purchased through our acquisitions of Magento and Marketo in the later part of fiscal 2018 and partially offset by certain fully amortized acquired intangible assets from previous acquisitions.

Amortization expense decreased during fiscal 2020 as compared to fiscal 2019 primarily due to certain intangible assets from previous acquisitions, including from Marketo and Omniture, becoming fully amortized during the year.

Non-Operating Income (Expense), Net

(dollars in millions)

Interest and other income (expense), net

Percentage of total revenue

2020 2019 2018 % Change

Interest expense $ (116) $ (157) $ (89) (26) %

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Percentage of total revenue * * *

Other income (expense), net 42 42 40 **

Percentage of total revenue * * *

Total non-operating income (expense), net $ (61) $ (63) $ (46) (3) %

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(**) Percentage is not meaningful.

Interest and Other Income (Expense), Net

Interest and other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments.

Interest and other income (expense), net also includes gains and losses on fixed income investments and foreign exchange gains and losses.

Interest Expense

Interest expense primarily represents interest associated with our Term Loan, senior notes and interest rate swaps.

In October 2018, we entered into a credit agreement providing for a $2.25 billion senior unsecured term loan for the purpose of partially funding the purchase price for our acquisition of Marketo.

Interest on our Term Loan is payable periodically at the end of each interest period, whereas interest on our senior notes is payable semi-annually, in arrears, on February 1 and August 1.

Floating interest payments on the interest rate swaps are paid monthly.

The fixed-rate interest receivable on the swaps is received semi-annually concurrent with the senior notes interest payments.

See Notes 6 and 17 of our Notes to Consolidated Financial Statements for further details regarding our interest rate swaps and debt, respectively.

Interest expense increased during fiscal 2019 as compared to fiscal 2018 primarily due to interest on our Term Loan which was entered into in the fourth quarter of fiscal 2018.

Interest expense represents interest associated with our debt instruments.

Interest on our Notes is payable semi-annually, in arrears, on February 1 and August 1.

Interest on our Term Loan, which was terminated in the first quarter of fiscal 2020, was payable periodically at the end of each interest period.

Floating interest payments on the interest rate swaps, which matured in the first quarter of fiscal 2020, were paid monthly and the fixed-rate interest receivable on the swaps was received semi-annually concurrent with the Notes interest payments.

Interest expense decreased during fiscal 2020 as compared to fiscal 2019 primarily due to lower average interest rates on our debt instruments that were refinanced in the first quarter of fiscal 2020.

Investment Gains (Losses), Net

Investment gains (losses), net consists principally of unrealized holding gains and losses associated with our deferred compensation plan assets which are classified as trading securities, and gains and losses associated with our direct and indirect investments in privately held companies.

Investment gains increased during fiscal 2019 as compared to fiscal 2018 primarily due to the gain recognized upon our acquisition of the remaining interest in Allegorithmic in January 2019, which was accounted for as an equity-method investment immediately before the acquisition.

See Note 3 of our Notes to Consolidated Financial Statements for further details regarding our acquisition of Allegorithmic.

Provision for Income Taxes

(dollars in millions)

Investment gains (losses), net decreased during fiscal 2020 as compared to fiscal 2019 primarily due to the gain recognized upon our acquisition of the remaining interest in Allegorithmic in January 2019.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments.

Other income (expense), net also includes realized gains and losses on fixed income investments and foreign exchange gains and losses.

Other income (expense), remained stable during fiscal 2020 primarily due to decreases in interest income driven by lower average interest rates offset by our change in methodology of accounting for foreign currency cash flow hedges.

Effective in the third quarter of fiscal 2019, option premiums, which were previously recorded in other income (expense), net, are recorded in accumulated other comprehensive income (loss).

Provision for (Benefit from) Income Taxes

(dollars in millions) 2020 2019 2018 % Change

Provision for (benefit from) income taxes $ (1,084) $ 254 $ 203 **

Percentage of total revenue (8) % 2 % 2 %

Effective tax rate (26) % 8 % 7 %

Our effective tax rate increased by approximately one percentage point during fiscal 2019 as compared to fiscal 2018 .

The effective tax rate for fiscal 2019 included U.S.

federal and state taxes associated with our current year international earnings resulting from the international provisions of the Tax Cuts and Jobs Act (“Tax Act”) effective this year and for additional foreign taxation on our foreign operations.

This increase was offset in part by the provisional accounting expense recorded in the prior year for the effects of the Tax Act adoption.

_________________________________________

(**) Percentage is not meaningful.

Our effective tax rate decreased by approximately 34 percentage points during fiscal 2020 as compared to fiscal 2019.

The lower effective tax rate was primarily due to the effects of the Tax Act enacted on December 22, 2017, which included the reduction in the statutory federal corporate income tax rate from 35% to 21% effective on January 1, 2018, and a related change to our corporate tax structure from which we serve our foreign customers that provided us the ability to deduct more expenses against our earnings in the U.S.

Beginning in our fiscal 2019, the annual statutory federal corporate tax rate is 21% and certain international provisions of the Tax Act, such as a tax on global intangible low-tax income, a base erosion and anti-abuse tax and a special tax deduction for foreign-derived intangible income, took effect.

Treasury Department has issued proposed regulations that could impact the calculation of taxes related to these provisions and which are anticipated to be applicable on a retroactive basis.

While the Company continues to evaluate the impact, such regulations have not been finalized and are subject to change.

We will account for new regulations in the period of enactment.

The change is primarily due to non-recurring tax benefits resulting from the intra-entity transfers of certain intellectual property rights (“IP rights”) completed during fiscal 2020.

Our effective tax rate for fiscal 2020 was lower than the U.S.

federal statutory tax rate of 21% primarily due to tax benefits resulting from the intra-entity transfers of certain IP rights, a favorable geographic mix of earnings and tax benefits related to stock-based compensation.

During fiscal 2020, we completed intra-entity transfers of certain IP rights to our Irish subsidiary in order to better align the ownership of these rights with how our business operates.

The transfers did not result in taxable gains;

however, our Irish subsidiary recognized deferred tax assets for the book and tax basis difference of the transferred IP rights.

As a result of these transactions, we recorded deferred tax assets, net of valuation allowance, and related tax benefits of $224 million and $1.13 billion, based on the fair value of the IP rights transferred in April and November 2020, respectively.

The tax-deductible amortization related to the transferred IP rights will be recognized over the period of economic benefit.

In years beyond fiscal 2020, the change in the geographic mix of international income resulting from these transfers is anticipated to adversely affect our effective income tax rates and cash flows.

However, the adverse impact to effective rates for cash paid for income taxes will be partially offset by future deductions on the transferred IP rights.

On December 22, 2017, the U.S.

Tax Act was enacted into law, which significantly changed existing U.S.

tax law and includes many provisions applicable to us.

Certain international provisions of the U.S.

Tax Act, such as a tax on global intangible low-tax income, a base erosion and anti-abuse tax and a special tax deduction for foreign-derived intangible income, took effect in fiscal 2019.

Treasury releases regulations that impact these provisions, we account for finalized regulations in the period of enactment.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized.

In making such a determination, we considered all available positive and negative evidence, including our past operating results, forecasted earnings, future taxable income and prudent and feasible tax planning strategies.

On the basis of this evaluation, we continue to maintain a valuation allowance related primarily to the realizability of state and foreign credits.

Total valuation allowance was $244.4 million as of November 29, 2019 .

On the basis of this evaluation, we continue to maintain a valuation allowance to reduce our deferred tax assets to the amount realizable.

The total valuation allowance was $276 million as of November 27, 2020 and is primarily attributable to certain state and foreign credits and foreign intangible assets.

We are a United States-based multinational company subject to tax in multiple U.S.

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A significant portion of our foreign earnings for the current fiscal year were earned by our Irish subsidiaries.

The Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax.

The current U.S.

tax law provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax.

As we repatriate the undistributed foreign earnings for use in the U.S., the distributions will generally not be subject to further U.S.

Subsequent to November 29, 2019 , final and proposed tax regulations were issued that are applicable to Adobe.

We are currently evaluating the impact of these enacted and issued regulations, but we do not anticipate they will have a material impact to our fiscal 2020 operating results.

The Tax Act included certain international provisions effective for us starting in fiscal 2019.

As discussed in Part 1.

Risk Factors, the applicability and impact of these new tax provisions, and of other international tax law changes effective for fiscal 2020 and beyond, will likely require us to respond by making change(s) to our international trading structure.

The net impact of such change(s) is uncertain but is anticipated to adversely affect our effective income tax rate and cash flows in years beyond fiscal 2020.

See Note 10 of our Notes to Consolidated Financial Statements for further information on our provision for income taxes.

In June 2020, California enacted legislation which includes a limitation on the utilization of research and development tax credits for a three-year period beginning in fiscal 2021.

The net impact of the legislation is uncertain but is anticipated to increase our California tax and, consequently, adversely impact our effective tax rates for the three-year period beginning in fiscal 2021.

See Note 10 of our Notes to Consolidated Financial Statements for further information on our provision for (benefit from) income taxes.

Accounting for Uncertainty in Income Taxes

The gross liabilities for unrecognized tax benefits excluding interest and penalties were $201 million, $173 million and $196 million for fiscal 2020, 2019 and 2018, respectively.

If the total unrecognized tax benefits at November 29, 2019 , November 30, 2018 and December 1, 2017 were recognized, $127.0 million , $145.2 million and $135.0 million would decrease the respective effective tax rates.

If the total unrecognized tax benefits at November 27, 2020, November 29, 2019 and November 30, 2018 were recognized, $136 million, $116 million and $136 million would decrease the respective effective tax rates.

The combined amount of accrued interest and penalties related to tax positions taken on our tax returns were approximately $26 million and $25 million for fiscal 2020 and 2019, respectively.

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We believe that within the next 12 months, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both.

Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $20 million .

Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits ranging from $0 to approximately $20 million over the next 12 months.

In addition, in countries where we conduct business and in jurisdictions in which we are subject to tax, including those covered by governing bodies that enact tax laws applicable to us, such as the European Commission of the European Union, we are subject to potential changes in relevant tax, accounting and other laws, regulations and interpretations, including changes to tax laws applicable to corporate multinationals such as Adobe.

These countries, other governmental bodies and intergovernmental economic organizations such as the Organization for Economic Cooperation and Development, have or could make unprecedented assertions about how taxation is determined in their jurisdictions that are contrary to the way in which we have interpreted and historically applied the rules and regulations described above in our income tax returns filed in such jurisdictions.

In the current global tax policy environment, any changes in laws, regulations and interpretations related to these assertions could adversely affect our effective tax rates or result in other costs to us which could adversely affect our operations and financial results.

Moreover, we are subject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities.

These tax examinations are expected to focus on our intercompany transfer pricing practices as well as other matters.

We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for adjustments that may result from these examinations.

In the current global tax policy environment, any changes in laws, regulations and interpretations related to these assertions could adversely affect our effective tax rates, cause us to respond by making changes to our business structure, or result in other costs to us which could adversely affect our operations and financial results.

Moreover, we are subject to the continual examination of our income tax returns by the U.S.

Internal Revenue Service and other domestic and foreign tax authorities.

These tax examinations are expected to focus on our intercompany transfer pricing practices, application of tax rules and other matters.

We cannot provide assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

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This data should be read in conjunction with our Consolidated Statements of Cash Flows.

(in millions)

November 29, 2019

November 30, 2018

(in millions) November 27, 2020 November 29, 2019

Cash and cash equivalents $ 4,478 $ 2,650

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Working Capital

Working capital as of November 29, 2019 and November 30, 2018 was $1.70 billion of a deficit and $555.9 million of a surplus, respectively.

The decrease was primarily due to the reclassification of $3.15 billion total carrying value of our $2.25 billion term loan due April 30, 2020 (“Term Loan”) and $900 million 4.75% senior notes due February 1, 2020 (“2020 Notes”) to current liabilities.

We intend to refinance our Term Loan and 2020 Notes on or before the due dates.

A summary of our cash flows is as follows:

Working capital as of November 27, 2020 and November 29, 2019 was $2.63 billion of a surplus and $1.70 billion of a deficit, respectively.

During the first quarter of fiscal 2020, we refinanced our 2.25 billion term loan due April 30, 2020 (“Term Loan”) and $900 million 4.75% senior notes due February 1, 2020 (“2020 Notes”).

See the section titled “Cash Flows from Financing Activities” below.

A summary of our cash flows for fiscal 2020, 2019 and 2018 is as follows:

(in millions) 2020 2019 2018

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For fiscal 2020, net cash provided by operating activities of $5.73 billion was primarily comprised of net income adjusted for the net effect of non-cash items.

The primary working capital sources of cash were net income coupled with an increase in deferred revenue, which was offset in large part by cash outflows due to an increase in prepaid expenses and other assets.

The increase in deferred revenue was primarily driven by increases related to Digital Media offerings with cloud-enabled services and Digital Experience hosted services.

The primary working capital use of cash was due to increases in prepaid expenses with certain vendors, sales commissions paid and capitalized, advanced payments related to income taxes and increase in long-term contract assets.

The primary working capital sources of cash were net income together with increases in deferred revenue and decreases in trade receivables, which were offset in part by increases in prepaid expenses and other assets.

The increase in deferred revenue was primarily driven by Digital Media offerings with cloud-enabled services, and the decrease in trade receivables was largely attributable to strong collections.

The primary working capital use of cash was due to increases in prepaid expenses and other assets driven by sales commissions paid and capitalized and, to a lesser extent, increases due to the timing of billings and payments associated with certain vendors.

Cash Flows from Investing Activities

For fiscal 2019 , net cash used for investing activities of $455.6 million was primarily due to purchases of property and equipment and our acquisition of the remaining equity interest in Allegorithmic.

These cash outflows were offset primarily by proceeds from sales and maturities of short-term investments, net of purchases.

See Note 3 of our Notes to Consolidated Financial Statements for more detailed information regarding our acquisitions.

For fiscal 2020, net cash used for investing activities of $414 million was primarily due to ongoing capital expenditures.

These cash outflows were offset in part by proceeds from sales and maturities of short-term investments, net of purchases.

Cash Flows from Financing Activities

For fiscal 2019 , net cash used for financing activities was $2.95 billion primarily due to payments for our treasury stock repurchases and taxes related to net share settlement of equity awards, which were offset by proceeds from re-issuance of treasury stock for our employee stock purchase plan.

For fiscal 2020, net cash used for financing activities of $3.49 billion was primarily due to payments for our treasury stock repurchases and taxes paid related to the net share settlement of equity awards, which were offset by proceeds from re-issuance of treasury stock for our employee stock purchase plan.

See the section titled “Stock Repurchase Program” discussed below.

We expect to continue our investing activities, including short-term and long-term investments, facilities expansion and purchases of computer systems for research and development, sales and marketing, product support and administrative staff.

Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business.

In February 2020, we issued $500 million of 1.70% senior notes due February 1, 2023 (“2023 Notes”), $500 million of 1.90% senior notes due February 1, 2025 (“1.90% 2025 Notes”), $850 million of 2.15% senior notes due February 1, 2027 (“2027 Notes”) and $1.30 billion of 2.30% senior notes due February 1, 2030 (“2030 Notes”).

We used the proceeds to repay the Term Loan and 2020 Notes concurrently.

See Note 17 of our Notes to Consolidated Financial Statements for information regarding our debt refinancing.

Other Liquidity and Capital Resources Considerations

Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2020 due to changes in our planned cash outlay, including changes in incremental costs such as direct costs and integration costs related to our acquisitions.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the risks detailed in Part I, Item 1A titled “Risk Factors.” However, based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months.

Our existing cash, cash equivalents and investment balances may fluctuate during fiscal 2021 due to changes in our planned cash outlay.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the pandemic and other risks detailed in Part I, Item 1A titled “Risk Factors.” While the pandemic has not negatively impacted our liquidity and capital resources to date, it has led to increased disruption and volatility in capital markets and credit markets which could adversely affect our liquidity and capital resources in the future.

However, based on our current business plan and revenue prospects, we believe that our existing cash, cash equivalents and investment balances, our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital, operating resource expenditure and capital expenditure requirements for the next twelve months.

Our cash equivalent and short-term investment portfolio as of November 27, 2020 consisted of asset-backed securities, corporate debt securities, foreign government securities, money market mutual funds, municipal securities and time deposits.

We use professional investment management firms to manage a large portion of our invested cash.

We have a $1 billion senior unsecured revolving credit agreement (“Revolving Credit Agreement”) with a syndicate of lenders, providing for loans to us and certain of our subsidiaries through October 17, 2023.

As of November 27, 2020, there were no outstanding borrowings under this credit agreement and the entire $1 billion credit line remains available for borrowing.

As of November 29, 2019 , we have a $2.25 billion Term Loan outstanding and $1.9 billion senior notes outstanding, consisting of our 2020 Notes and $1 billion of 3.25% senior notes due February 1, 2025 (the “2025 Notes,” and together with the 2020 Notes, the “Notes”).

The Notes and Term Loan rank equally with our other unsecured and unsubordinated indebtedness.

During the first quarter of fiscal 2019, we reclassified the 2020 Notes as current debt in our Consolidated Balance Sheets.

During the second quarter of fiscal 2019, we reclassified the Term Loan as current debt in our Consolidated Balance Sheets.

As of November 29, 2019 , the carrying value of the 2020 Notes was $899.6 million which includes the fair value of the related interest rate swap and is net of debt issuance costs, and the carrying value of the Term Loan was $2.25 billion , net of unamortized original issuance discount.

We intend to refinance the Term Loan and 2020 Notes on or before the due dates.

During the third quarter of fiscal 2019, in anticipation of refinancing our Term Loan and 2020 Notes, we entered into Treasury lock agreements with large financial institutions which fixed benchmark U.S.

Treasury rates for an aggregate notional amount of $1 billion of our future debt issuance.

These derivative instruments hedge the impact of changes in the benchmark interest rate to future interest payments and will be terminated upon debt issuance.

Our short-term investment portfolio is primarily invested in corporate debt securities, asset-backed securities, municipal securities and U.S.

Treasury securities.

We use professional investment management firms to manage a large portion of our investment portfolio.

As of November 27, 2020, we have $4.15 billion senior notes outstanding, consisting of the 2023 Notes, 1.90% 2025 Notes, 2027 Notes, 2030 Notes and the $1 billion of 3.25% senior notes due February 1, 2025 (the “3.25% 2025 Notes,” and together with the aforementioned notes, the “Notes”).

The Notes rank equally with our other unsecured and unsubordinated indebtedness.

We expect to continue our investing activities, including short-term and long-term investments, purchases of computer systems for research and development, sales and marketing, product support and administrative staff, and facilities expansion.

As of November 27, 2020, we expect our capital investment to be approximately $550 million to $650 million, primarily to fund our San Jose and Bangalore construction projects through fiscal 2022.

Furthermore, cash reserves may be used to repurchase stock under our stock repurchase program and to strategically acquire companies, products or technologies that are complementary to our business.

See Note 3 of our Notes to Consolidated Financial Statements for further information regarding this acquisition .

Stock Repurchase Program

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We enter into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time.

We only enter into such transactions when the discount that we receive is higher than the expected foregone return on our cash prepayments to the financial institutions.

We only enter into such transactions when the discount that we receive is expected to be higher than the foregone return on our cash prepayments to the financial institutions.

There were no explicit commissions or fees on these structured repurchases.

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The following is a summary of our structured stock repurchases executed with large financial institutions during fiscal 2020, 2019 and 2018:

(shares in thousands and total cost in millions)

Board approval dates

Average per share

For fiscal 2019 , 2018 and 2017 , the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 29, 2019 , November 30, 2018 and December 1, 2017 were excluded from the computation of earnings per share.

(in millions, except average price per share)

2020 2019 2018

Board approval dates Shares Average per share Shares Average per share Shares Average per share

January 2017 — $ — — $ — 8.7 $ 230.43

May 2018 8.0 $ 376.38 9.9 $ 270.23 — $ —

Total cost $3,024 $2,671 $2,002

For fiscal 2020, 2019 and 2018, the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 27, 2020, November 29, 2019 and November 30, 2018 were excluded from the computation of earnings per share.

As of November 27, 2020, $255 million of prepayments remained under the agreement.

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Upon completion of the $950 million stock repurchase agreement, $1.1 billion remains under our May 2018 authority.

Further, in December 2020, our Board of Directors granted us additional authority to repurchase up to $15 billion in common stock through the end of fiscal 2024.

We have not drawn from our new $15 billion authority as of the issuance of these financial statements.

See Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities for share repurchases during the quarter ended November 27, 2020 .

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of November 29, 2019 consist of obligations under operating leases, royalty agreements and various service agreements.

See Note 16 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments.

Our principal commitments as of November 27, 2020 consist of our Notes and obligations under operating leases, royalty agreements and various service agreements.

See Notes 16, 17 and 18 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments.

Contractual Obligations

The following table summarizes our contractual obligations as of November 27, 2020:

(in millions)

Payment Due by Period

Term Loan and Notes, including interest

Operating lease obligations, net

(in millions) Payment Due by Period

Total Less than

1 year 1-3 years 3-5 years More than

Notes, including interest $ 4,763 $ 99 $ 693 $ 1,659 $ 2,312

Operating lease obligations 657 104 162 119 272

Purchase obligations 1,885 872 1,012 1 —

As of November 29, 2019 , our Term Loan’s carrying value was $2.25 billion .

At our election, the Term Loan will bear interest at either (i) the London Interbank Offered Rate (“LIBOR”) plus a margin, based on our debt ratings, ranging from 0.500% to 1.000% or (ii) a base rate plus a margin, based on our debt ratings, ranging from 0.040% to 0.110% .

Interest is payable periodically, in arrears, at the end of each interest period we elect.

Based on the LIBOR rate at November 29, 2019 , our estimated maximum commitment for interest payments was $23.2 million for the remaining duration of the Term Loan.

As of November 29, 2019 , the carrying value of our Notes payable was $1.89 billion .

Interest on our Notes is payable semi-annually, in arrears on February 1 and August 1.

At November 29, 2019 , our maximum commitment for interest payments was $200.1 million for the remaining duration of our Notes.

Our Term Loan and Revolving Credit Agreement contain similar financial covenants requiring us not to exceed a maximum leverage ratio.

Total $ 7,305 $ 1,075 $ 1,867 $ 1,779 $ 2,584

As of November 27, 2020, the carrying value of our Notes was $4.12 billion.

Interest is payable semi-annually, in arrears on February 1 and August 1.

At November 27, 2020, our maximum commitment for interest payments was $613 million for the remaining duration of our outstanding Notes.

Our Revolving Credit Agreement contains a financial covenant requiring us not to exceed a maximum leverage ratio.

As of November 27, 2020, we were in compliance with this covenant.

We believe this covenant will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan.

Our senior notes do not contain any financial covenants.

Under the terms of our Term Loan and Revolving Credit Agreement, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists.

Our Notes do not contain any financial covenants.

Under the terms of our Revolving Credit Agreement, we are not prohibited from paying cash dividends unless payment would trigger an event of default or if one currently exists.

We do not anticipate paying any cash dividends in the foreseeable future.

Transition Taxes Liability

As a result of the Tax Act enacted on December 22, 2017, an accrued transition tax liability of approximately $427.1 million as of November 29, 2019 is payable in installments through fiscal 2026.

Our transition tax liability which was accrued as a result of the U.S.

Tax Act was approximately $390 million as of November 27, 2020 and is payable in installments through fiscal 2026.

Tax Act provides an exemption from federal income taxes for distributions from foreign subsidiaries made after December 31, 2017, including certain earnings that were not subject to the one-time transition or global intangible low-tax income tax.

As we repatriate the undistributed foreign earnings for use in the U.S., the distributions will generally not be subject to further U.S.

Accounting for Uncertainty in Income Taxes

See Results of Operations - Provision for Income Taxes above and Note10 of our Notes to Consolidated Financial Statements for our discussion on accounting for uncertainty in income taxes.

See Results of Operations - Provision for (Benefit from) Income Taxes above and Note 10 of our Notes to Consolidated Financial Statements for our discussion on accounting for uncertainty in income taxes.

We have certain royalty commitments associated with the licensing of certain offerings.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis